If the ALP National Conference scraps the party's three mines policy, it could trigger a chain reaction that leads to a worldwide revaluation of uranium shares.
Australia's great uranium boom, which has seen more than 100 highly speculative exploration stocks soar to remarkable heights, is running out of puff.
...When the Australian Labor Party debates whether to end its controversial "three mines" uranium policy, a new set of factors will influence share pricing.
No longer will it be a case of rampant optimism. A little sanity will return as serious investors ... face up to the reality that conditions are starting to change, and although the uranium price might sneak a little higher in the short term the pendulum is poised to swing back.
What is worrying traders - who have made fat profits from playing the uranium market as the price of the metal has soared from $US7 a pound three years ago to a current spot market price of $US113 - is a series of indicators pointing to the peak being near. Those factors, which could see a U-turn in the U-boom include:
- The ALP giving a green light to new uranium mines in Australia, which is sitting on the world’s biggest inventory of undeveloped uranium reserves.
- Confirmation from Australia’s two biggest uranium producers, BHP Billiton and Rio Tinto, that they are poised to boost output when/if the ALP alters its anti-uranium stance, easily beating small players in the game to the punch.
- News that Canada’s big Cigar Lake mine, which was closed after a flood, will not be lost permanently but will be back in production in two years.
- A realisation that although it will takes years to develop new uranium mines, it will take longer to build new nuclear power stations.
- Claims that 20% of the world’s supply of surplus uranium is now held by hedge funds with their buying the major force in the 16-fold rise in the spot-market uranium price.
- Comments from the nuclear power industry executives that they are aware of the games being played by hedge funds which must, eventually, sell their stockpile to the power generators.
- The curiously disturbing “conversion” trend as late arrivals at the uranium party switch out of other commodities (such as gold) and into uranium
Individually, none of these factors point to an immediate crash in the price of uranium, or uranium shares. Taken together, they represent a collective indication of market conditions changing and a warning that now is a good time to cull a portfolio of uranium stocks, to focusing on quality rather than quantity; in other words, pick the stocks most likely to succeed, which is never easy at the height of a boom.
Stocks that stand out in terms of asset quality include:
- Paladin, which started production at its Langer Heinrich project in Namibia last year and has a pipeline of future mines.
- Energy Metals, which started a major drilling program at its highly rated, and 53.3%-owned, Bigrlyi project in the Northern Territory last week.
- Compass Resources, which is keen to develop its Mt Fitch project in the Northern Territory.
- Alliance Resources, which has South Australian Government backing for its Beverley 4-Mile project near the Beverley mine of Heathgate Resources.
Wildhorse Energy, which is drilling its Sweetwater project in the US state of Wyoming. The project is adjacent to Rio Tinto’s Sweetwater Mill, the biggest uranium processing mill in the US.
These companies, plus a handful of others, can actually point to a uranium resource in the ground that has some potential for near-term development.
In terms of measuring success in a speculative boom, just as it was in the information technology boom of eight years ago, it is these “first movers” that are more likely to succeed...
If there is to be a single “trigger event” that will case the break and start a worldwide revaluation of uranium shares, it is the policy adopted by the ALP at its conference, in Sydney from Friday to Sunday.
Given the public stance of Opposition Leader Kevin Rudd, who favours more uranium mines, a change of policy seems likely. A “trickle down” process of change then needs to occur, with state leaders falling into line with the national policy.
Queensland Premier Peter Beattie has indicated he will probably follow the national lead. WA Premier Alan Carpenter says he might not. The position of these two men is important but not critical, because there are plenty of potential uranium projects in the Northern Territory and South Australia that could substantially boost the supply of Australian uranium. However, if Queensland and WA become uranium-friendly, the floodgates could really be opened.
In WA alone, Rio Tinto is waiting patiently for a green light to develop its Kintyre project, which was taken right through to a feasibility study more than 10 years ago and is ready to go. The same can be said for BHP Billiton’s Yeelirrie project in WA, which the previous owner, WMC Resources, took through to a pilot plant and feasibility study more than 20 years ago.
In both cases the uranium price used to demonstrate financial viability was less than half what it is today.
“Together with the potential of Kintyre in WA and Sweetwater in the US, we expect to be in a position to significantly expand our uranium production capacity in the near future,” retiring Rio Tinto chief executive, Leigh Clifford, told the company’s annual meeting two weeks ago.
In terms of a warning shot across the bows of the penny dreadful flotilla of uranium pretenders, Clifford’s parting comments were a reminder that conditions in the uranium market are changing and that the era of speculation is ending – and that the mining industry is dusting off its genuine production plans.
Not content with remarks about future mine development plans, Clifford added his thoughts on how expansion plans were being accelerated at Rio Tinto’s two existing mines, Rossing in Namibia and Ranger in the Northern Territory.
Rio Tinto is not alone. Around the world there is a stampede among uranium producers to catch the high metal prices before they disappear or, as is more likely, revert to a much lower long-term price close to $US40 a pound – or 64% below the current (and grossly inflated) spot market.
What makes particularly interesting reading about the market for uranium, which is generally sold under long-term contract rather than a day-to-day floating price, is that the nuclear power industry is worried by the spot price of $US113 a pound, but not panic buying.
Frank Rives, director of nuclear fuel at Entergy Corp, the second biggest nuclear power station operator in the US, told Dow Jones Newswires late last month: “There’s a period where the market is going to be very ugly from a (uranium) buyer’s standpoint. But, in the long term, pricing will settle into a more reasonable area.”
Jim Malone, vice-president of nuclear fuels at Exelon Corp, the biggest nuclear power plant operator in the US, said the uranium price was likely to settle to about $US40 a pound. “The reality is that the speculators have sent an amplified signal to the market to encourage exploration and production. In the longer term they have done us a favour, though some of my colleagues have cringed at the short-term costs.”
The view of Rives and Malone, two professional uranium buyers, is that their supply pipe has been stomped on by the hedge funds, and by the time it takes to switch over from using re-processed ex-military nuclear material, to freshly-mined uranium.
They know that while the world is starting to embrace nuclear power as part of the push to combat global warming, it is easier to open a uranium mine than it is to build a nuclear power plant – and even the 251 new nuclear plants planned around the world will have little difficulty in finding uranium supplies now that the mining industry has got the message.
One geological point overlooked in the uranium stampede – which was artificially accelerated last October when news of trouble at Cigar Lake first hit the market – is that uranium is not rare. It is as plentiful as tin or zinc, and relatively easy to find because of its tell-tale radioactive signature.
In terms of known reserves (assuming no political interference as happened in Australia over the past 30 years) there is an enormous abundance of uranium, with the Uranium Information Centre estimating that there is enough to last the world for 70 years – far more than most other minerals, and with minimal exploration for the past 20 years.
From next weekend, as the ALP hierarchy gathers in Sydney, a new set of circumstances will start to unfold that will lead to future increased supply – mainly because Australia is sitting on about 1.1 million tonnes of uranium, or 24% of the world’s “known” recoverable reserves.
We are, in effect, the 800-pound gorilla waiting for a political fix at the ALP national conference this weekend to hit the world market.
The judgement call for investors is when will the increase reach the market or, of more immediate interest, when will the hedge funds judge that this is likely to happen and sell some (or all) of their stockpile.
Whatever the timing in these events, there is no doubt that we are near the high-water mark, and although there might be one more upward move, the future trend is undoubtedly down and only those companies in production, close to production, or with a genuine exploration project with the potential to become a mine will survive the inevitable shakeout.